Premature Deindustrialization

How do countries go from developing to developed?

Historically, export-oriented growth -- resulting from a period of industrialization -- has been a driving factor behind economic development.

However, some economists are now worried that developing countries are de-industrializing too soon or never saw much industrialization at all, limiting the potential for export-oriented growth. This is known as the theory of “premature deindustrialization.”

Most of today’s wealthy countries, such as South Korea, Japan, and Germany, industrialized and became strong in manufacturing – employing as much as 40% of the workforce. Those manufacturing jobs helped boost exports at a critical time in these countries’ development.

A large manufacturing sector also encourages the building of infrastructure in order to produce goods and get them to market. Additionally, manufacturing jobs tend to be held for a long time and employers have the incentive to invest in their workers’ skills. When overall human capital begins to improve, workers are more valuable, wages go up, and a middle-class begins to emerge.

Today, though, manufacturing is more automated. Noisy factories are now quiet places where machines and robots have replaced the human worker. Even in China, a relatively low-wage economy, we see the most robots of any nation. Premature deindustrialization is a very real concern.

What does the future have in store for these developing countries? It’s somewhat unclear, but there are a number of alternative paths to development -- including service-sector exporting, internal trade growth, and consumer-led growth.